Fixed-income markets ready for challenge and change, says ICMA chief

After several boom years, the global capital markets are facing uncertain economic conditions. On top of an unprecedented global pandemic, Russia’s invasion of Ukraine has further squeezed supply chains and intensified inflationary pressure. And market conditions remain challenging.

But for Bryan Pascoe, chief executive of the International Capital Market Association (ICMA), it is in precisely such circumstances that the fixed-income markets demonstrate their mettle.

Today is certainly something of a baptism of fire for Mr Pascoe, who took up his post just a year ago, in September 2021. Within a short time, market conditions have changed substantially. But, again, he reflects that it is in evolving circumstances when trade associations such as ICMA play their most important role.

The association, he says, remains focused on supporting “robust and efficient international fixed-income markets” as its core objective. “Fundamentally, I wouldn’t want to change anything about that,” he says. However, there are some elements he wants to emphasise, such as ensuring that dialogue and participation includes practitioners from across the industry, including newer and emerging areas, and that the priorities of emerging markets, as well as developed markets, are well covered.

ICMA’s traditional grouping of activity into primary markets, secondary markets and more product-specific verticals, such as repo and collateral or asset management, are still largely valid, Mr Pascoe believes, but adds that the organisation will increasingly find itself at the nexus of genuinely cross-industry issues. And it is essential that ICMA is able to address them in a holistic way. He highlights the fast expanding and evolving sustainable finance ecosystem and the digitalisation of the bond markets as two prime examples of that.

Sustainable finance leadership

“The evolution of sustainable finance is going to be both on the regulatory and reporting side, including the development of taxonomies and standards, and also increasingly how it applies to new market areas such as securitisation, repo markets or commercial paper,” he says. “We have a big role to play in both aspects of that.”

On the regulatory side, Mr Pascoe believes ICMA will continue to be a “vocal advocate for international consistency and standardisation for frameworks, reporting standards and disclosure requirements”. As the secretariat for the principles (including the green bond, social bond and sustainability-linked bond principles), ICMA has long played a leading role in driving robust standards and regulatory advocacy in the sustainable finance space across the fixed-income industry.

Alongside growth in financial activity with a sustainability flavour are concerns about greenwashing. Mr Pascoe is sensitive to this and believes ensuring market integrity and high standards will be essential for the long-term success of these burgeoning markets. “It is something that collectively we must be very focused on,” he says.

In the spirit of increasing market confidence and transparency, ICMA is actively looking into (via a partnership with a reputable data organisation) creating a transaction database which will highlight information such as the environmental, social and governance ratings and other metrics, such as key performance indicators or science-based targets associated with sustainable securities. “We believe it could be a very powerful tool in aiding market transparency, building shared understanding and analysing market developments,” he says.

Bond market digitalisation

Speaking about the digitalisation agenda, in which ICMA is also heavily engaged, he says: “In some ways that area is even more complex than the sustainability focus, in part because we have seen such a proliferation of different ideas, approaches, entities and platforms.”

Mr Pascoe sees digitalisation, such as via developments in tokenisation and distributed ledger technology (DLT), as an area that will have a genuinely transformational impact on the bond markets, thanks to the realisation of concepts such as instantaneous settlement.

“The fixed-income market is rife with opportunities for efficiency improvements, for example, if you consider the clunkiness of the current issuance processes which involve multiple stakeholders and many different pieces of documentation,” he says. “If there was a process by which all the parties could access a shared digital ledger, which centralises all the documentation and makes clear where it is in the approvals process, that is a massive transformational opportunity.”

Evolution not revolution

This is a transition that is going to take time and require careful calibration. “We’re clearly not going to flip to every issue being managed on this basis overnight – it is far too complex,” says Mr Pascoe. “It will be important to work through this step by step, creating the right frameworks and the environment to begin to industrialise it.”

He highlights, for example, market participants’ understandable concerns about the potential downsides of technologies such as automation, which could mean they lose some control or oversight over the issuance process. “It’s about creating the right blend of inputs to ensure that the digitalised process is going to deliver that same quality of outcome as the status quo. Getting there will require some time and thought, but there is no insurmountable reason why the technology can’t provide the answer.”

But there are also regulatory questions in areas such as investor protection, ensuring process transparency and visibility, and clarifying ownership and liability via DLT and tokenised securities-based issuances and trades. Mr Pascoe speaks optimistically about efforts such as the DLT pilot regime in the EU to road-test how trading venues can operate as digital exchanges, and how such pilots may “shine a light” on whether there are aspects of the regulatory framework which will need to be adapted for a digital world. He is increasingly of the opinion that central bank digital currencies will have a key role to play in ensuring these markets develop and operate in an orderly manner.

Mr Pascoe sees ICMA’s role in this evolving landscape not as “sponsoring specific ideas or identifying winners”, but rather “bringing stakeholders together to help ensure the industry moves forward with standards and approaches that are going to bring the greatest efficiencies… It’s about finding approaches that can ideally be embedded throughout the whole securities lifecycle to improve the speed, the efficiency and the cost of issuance, settlement, trading and lifecycle management.”

He points to examples of industry-wide initiatives in which ICMA is a leading participant, which he believes will have an important impact. These include the Common Domain Model (CDM) for bonds and repo, which is now entering its second phase. The idea behind the CDM is to create a standardised, machine-readable and machine-executable process for the issuance, trade and lifecycle management of bonds and repo contracts, thereby providing the foundation for the development of interoperable and scalable automation across the industry.

ICMA has led on the development of the standard, which has just entered its second phase and is based on the CDM first developed by the International Swaps and Derivatives Association for the derivatives markets, as well as convening a number of committees and working groups such as the FinTech Advisory Committee and its Blockchain Bonds Working Group.

A range of voices

“I think the industry has been doing a better job of ensuring the relevant parties are at the table for significant discussions,” says Mr Pascoe, pointing to the importance of solutions providers, stock exchanges, central clearing counterparties and lawyers being involved in working groups alongside the big sell-side players. He is pleased that ICMA’s own membership has continued to diversify, boasting increased representation among solution providers and market infrastructure providers, as well as a growing number of buy-side members within fund management. “We’re keen to continue to develop in areas where we think we can add value and provide relevant support,” he says.

However, he acknowledges the importance in this context of balancing the needs and perspectives of different members. “It’s important to cross-check and make sure that ultimately we’re all working towards the same overall goals,” he says, giving the example of debates about the development of consolidated tapes for bonds. “Banks and investors have the same overall objectives around effective market functioning and price discovery, but will look at issues such as transparency and liquidity provision through very different lenses. The important thing is being able to align those objectives even if market participants are coming from very different starting points.”

Ensuring market resilience

Despite the challenging market backdrop Mr Pascoe remains optimistic, and believes market performance during the pandemic has demonstrated the ability of market participants to adapt and demonstrated the market’s underlying resilience. He reflects that although the regulatory reforms in the wake of the financial crisis and the sovereign debt crisis were challenging to implement, “ultimately it has put the market in a better position because firms are generally well-capitalised and not over-leveraged”. However, he adds, there continue to be concerns about market liquidity, particularly in the secondary bond markets, “because there is less warehousing ability”, which could make the markets vulnerable if there is a protracted period of volatility.

This is not a new issue, and Mr Pascoe suggests the market has already started adapting, with new trading approaches and the opening of alternative channels of liquidity, as well as market participants over time becoming more comfortable with, and able to operate within, banks’ modified approach to risk management in the post-crisis era. Nonetheless, particularly in areas such as the money markets, where liquidity issues have been more acute, this continues to be an area on which ICMA will “advocate for regulation to be framed in the best way to support well-functioning markets”.